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How to avoid payment terms pitfalls and cash flow problems

You’ve received a good order from a customer, ordered and paid for the materials to complete the work, made and despatched the finished product and issued your happy customer with their invoice. Everything is complete and everyone is happy, you just have to sit back and wait for payment. And wait. And wait…

Don't be lapse with payment terms

When is your customer going to pay? If you don’t have any agreed payment terms, the answer to that could be whenever they feel like it resulting in huge cash flow problems for your business. Most businesses will not survive if their attitude to being paid is so relaxed that it is left in the hands of their customers to decide when to pay up.

If you think you are going to get paid on a particular date, but your customer has other ideas, you could be left with a big cash flow problem. If you have already allocated those funds in your cash flow for payment of some of your own liabilities, unless you have other resources to call upon in order to settle the liabilities, your own business could start to suffer.

Steps to avoid payment problems

There are a number of steps you can take to ensure that cash flow does not become a problem for you:

Firstly, ensure that you have payment terms agreed with your customers when the order is placed and that you have the agreement in writing.

Check whether your payment terms allow you to charge a late payment penalty and apply interest. If payment is not made on time, a further invoice with additional charges may help in obtaining payment.

If payments are late, make sure you have systems in place to chase them immediately. If your customers are regularly allowed to pay late, it will make it more difficult to start insisting on payment being made on time. Make it clear from the outset that payment will be expected by its due date.

If your customers are struggling financially, they may be having to decide who to pay first and who to delay paying. If your customers know that you will not accept late payment, it is more likely that you will be paid on time. Make it clear to your customers that you will not accept being paid late.

Ensure that the payment terms are re-iterated on your invoice to reminder customers again when payment is due.

Make sure you have a company policy in place detailing what payment terms you offer and who in your business has the authority to agree anything different. If you are operating in a competitive market, your staff may be inclined to offer longer payment terms in order to secure a deal. You should have strict controls in place to ensure that longer payment terms are only offered when appropriate.

Taking these steps will help you to keep your business’ finances under control and leave you less exposed to the risk of late payment causing your business cash flow problems. Being able to manage cash flow is key to success in any business and it will be impossible to produce a cash flow forecast of any real meaning if you can’t predict when you are going to get paid.

Implementing these steps will help to create a healthy, positive cash flow for your business going forward, but if you are already experiencing cash flow problems as a result of customers paying late, you may need to deal with the problems that arise from late payment first.

Short term business finance may help

Short term business funding may be necessary to bridge the gap between when you need to settle your own liabilities and when you will actually receive payment from your customer. Approaching your bank is most likely to be your first step, although many are finding that with banks having tightened up their criteria for approving business loans and being successful in obtaining a loan that way can prove difficult. For those who are successful, the length of time taken to go through a bank’s rigorous application process may to too lengthy to be useful in addressing the issues that you have.

A short-term business loan may therefore be the answer, such as those available from Cashsolv. These emergency business loans can be for any sum between £20,000 and £250,000 and can be in your company’s account within 24 hours. A business loan would enable you to settle your ongoing commitments whilst you chase down money due to you. Once your cash flow is back on track and you have begun implementing the tips set out above, you will be on a better path to long-term, healthy cash flow.

For more information on how a Cashsolv emergency loan can help your business, please read our guide.

By Suzy Franklin | 20th February 2015

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